267 International Forestry Review Vol. 6(3-4), 2004

China’s development of a plantation-based wood pulp industry: government policies, financial incentives, and investment trends1

C. BARR and C. COSSALTER Senior Policy Scientist, Forests and Governance Programme, CIFOR, Jalan CIFOR, Situ Gede, Sindangbarang, Bogor Barat 16680, Indonesia Senior Plantation Scientist, Forests and Environmental Services Programme, Jalan CIFOR, Situ Gede, Sindang- barang, Bogor Barat 16680, Indonesia

Email: [email protected] and [email protected]

SUMMARY

The Chinese government is aggressively promoting development of a domestic wood pulp industry, integrated with a plan- tation-based fiber supply and downstream paper production. It is doing so by providing discounted loans from state banks, fiscal incentives, and capital subsidies for establishment of at least 5.8 million hectares of fast-growing pulpwood planta- tions. This article examines the development of bleached hardwood kraft pulp (BHKP) mills in South China, including the Asia Pulp & Paper (APP) Jinhai mill in Hainan Province and the proposed Fuxing pulp mill project in Province. Both mills face fiber shortfalls over the medium term, and significant new investments in plantation development will be needed to provide a sustainable fiber supply at the mills? projected capacity levels. However, there are few sites in south- ern coastal China where fiber can be grown at internationally competitive costs. In most instances, the cost of Chinese plan- tation pulpwood will be considerably higher than in countries like Indonesia and Brazil, raising important questions about the economic competitiveness of Chinese pulp producers even within their home market.

Keywords: China; wood pulp, plantations, Asia Pulp & Paper, Fuxing

INTRODUCTION tic producers modernize their operations and as in- ternational producers seek to capture a share of Chi- During the last 15 years, China has emerged as a lea- na’s growing market (He and Barr, in this issue). ding player in the global pulp and paper sector. Chi- Historically, China’s domestic pulp industry has na has accounted for more than 50% of the world’s been structured around large numbers of small-scale overall growth in paper and paperboard production mills relying heavily on nonwood fibers, including since 1990, when the country produced an aggregate bamboo, bagasse, wheat straw and other agricultural of 13.7 million tonnes across all grades. With 43.0 mil- residues. Much of the new paper and board capacity lion tonnes of paper and board production in 2003, now coming online, however, relies on recovered pa- China is now the world’s second largest producer, per obtained from both domestic sources and im- surpassed only by the United States. The country’s ports (Spencer 2004). Demand for wood-based pulp aggregate paper and board production is expected to has also grown substantially in recent years, particu- reach 68.5 million tonnes per year by 2010, as domes- larly as China’s production of printing and writing pa- per and other high-grade papers has expanded. A re- 1 The research on which this article is based was funded by the cent forecast projects that by 2010, China’s paper and United Kingdom’s Department for International Develop- board industry will consume some 60 million tonnes ment (DfID) and the European Commission’s Asia Pro Eco Programme. The authors gratefully acknowledge the support of fiber annually across all types and grades - that is, of each these institutions. The authors also wish to thank Dr. recovered paper, nonwood pulp, and wood-based Lu Wenming and Dr. Zhang Huaiquing at the Chinese Acade- pulp (He and Barr, in this issue). Demand for various my of Forestry for theit collaboration in this study, and to grades of wood-based pulp is expected to reach 15.1 acknowledge the valuable assistance provided by the Hainan million tonnes per year by 2010 – up from 9.2 million Provincial Forestry Bureau; the Guangxi Provincial Forestry Bureau; the Guangdong Provincial Forestry Bureau; and the tonnes in 2003 – at which point wood pulp will ac- Forestry Bureau of Prefecture. In addition, the au- count for approximately 25 % of total fiber consumed thors are grateful to two anonymous reviewers for providing by Chinese producers. Bleached hardwood kraft pulp many helpful comments on an earlier draft of this study. The (BHKP) and bleached softwood kraft pulp (BSKP) are authors are, of course, for any errors of fact or analysis. expected to account for roughly two-thirds of this 2 Specific projections of demand for the various grades of wood pulp in 2010 are as follows: BHKP – 6.1 million tonnes; demand, while unbleached kraft pulp (UKP) and BSKP – 4.3 million tonnes; UKP – 2.2 million tonnes; and mechanical and semi-mechanical wood pulp account mechanical/semi-mechanical wood pulp – 2.3 million tonnes for the remainder.2 (see He and Barr, in this issue). To meet this growing demand, the Chinese govern- C. Barr and C. Cossalter 268 ment has aggressively promoted the development of (SFA 2002b). Policymakers recognize the substantial a domestic wood pulp industry. It has done so by set- volumes of wood pulp that China will need to consu- ting ambitious capacity expansion targets for projects me to produce the increasing volumes of paper and that integrate wood pulp and high-grade paper pro- paperboard that are projected over the medium-term. duction and by allocating several million hectares for To restrict the outflow of hard currency and to limit the establishment of fast-growing pulpwood planta- the industry’s reliance on highly cyclical international tions. To support these projects, the government has markets, they have made the development of integra- streamlined the sector’s investment approval process ted wood pulp and paper production within China a and provided a variety of financial incentives and capi- cornerstone of the sector’s industrial strategy. tal subsidies. These include several billion dollars On the other hand, the government has sought to worth of loan interest subsidies, discounted credit, close large numbers of heavily polluting nonwood and extended repayment periods for loans from state- pulp mills. Mechanical pulp mills using agricultural owned banks. residues have been a major source of water pollution In spite of the government’s substantial support, in many parts of China, and the government has re- the development of a competitive wood pulp indus- portedly closed over 4,000 small-scale nonwood pulp try in China faces a number of fundamental challeng- mills since 1999 (Jaakko Pöyry 2001). Within this con- text, Chinese policymakers view the expansion of es. First, the cost of growing wood fiber in China is chemical wood-based pulp production as a means of considerably higher than it is in countries like Indo- replacing the lost capacity with a cleaner and more ef- nesia and Brasil. As such, many analysts question ficient pulping process. By promoting the develop- whether Chinese wood pulp producers will be com- ment of large-scale wood pulp mills, government petitive even within their home market, particularly planners also view this transition as being necessary when they can often import market pulp at a lower to achieve the economies of scale needed to support an cost than producing it themselves (cf Wright 2004; internationally competitive paper industry in China. Kuusisto 2004). Second, there are signs that govern- The government has used a variety of policy measu- ment subsidies are encouraging pulp producers in res to promote the development of a domestic wood some parts of China to develop large-scale mills be- pulp industry. China’s Tenth Five-Year Development fore fully securing a sustainable wood supply. The Plan, covering the period 2001-2005, called for paper areas planted and the productivity levels achieved capacity to increase by 14 million air-dried tonnes per thus far are likely to fall well short of what will be year (Adt/yr) by 2010 and prioritized the expansion of needed to meet the projected demand for wood fiber, projects that integrated fast-growing pulpwood plan- at least over the medium term and perhaps beyond tations, wood pulp production, and high-grade paper (Cossalter 2004a; 2004b). Third, many of the risks and production (SFA 2002b). Specifically, it set a short- social impacts associated with fast-growing planta- term target for domestic wood pulp capacity to triple in tion development in China have not been fully evalua- size from its 2000 level by reaching 2.2 million Adt/yr ted. by 2005. To implement these targets, the National De- In this article, we examine the policies and finan- velopment and Planning Commission (NDRC) in cial incentives that are now being used by the Chinese 2001 issued a list of 42 priority pulp and paper pro- government to promote the development of a domes- jects which will involve approximately US$ 24 billion tic wood pulp industry and integrated plantation re- in investment from both domestic and foreign sour- source base. We then assess the development of blea- ces by 2010 (AF&PA 2004). The NDRC has scheduled ched hardwood kraft pulp (BHKP) mills in South Chi- 13 of these projects which involve the integration of na, where the largest investments in new pulp capaci- high-grade paper production with fast-growing plan- ty and fast-growing plantations are now being made. tations – including three large-scale chemical pulp The wood supply strategies of the Asia Pulp & Paper mills – for fast-track investment approval and govern- (APP) Hainan Jinhai mill project in Hainan Province ment financial incentives. and the proposed Fuxing pulp mill project in Guang- As in other key sectors, the government has of- dong Province are discussed in detail. fered significant financial incentives and capital sub- sidies to support priority pulp and paper projects. GOVERNMENT PROMOTION OF DOMESTIC WOOD Discounted loans from the China Development Bank, PULP PRODUCTION3 one of four government policy banks, and the Agricul- tural Bank of China, a state-owned commercial bank, As part of its broader effort to expand and modernize the country’s pulp and paper sector, the Chinese go- 3 The goverment’s policies to promote a wood-based pulp in- vernment has actively promoted the development of dustry are described in some detail in an excellent report a domestic wood-based pulp industry to achieve two published in March 2004 by the American Forest and Paper complementary policy objectives. On the one hand, Association (AF&PA) entitled „China’s Fiber Resources and Forestry Industry Development,“ Much of the information the government has sought to reduce China’s grow- presented in this and the following section has been adapted ing reliance on various grades of imported wood pulp from this report. 269 China’s development of plantation-based wood pulp industry have been an important source of financing for many projects (AF&PA 2004). Previously, the central govern- producers (AF&PA 2004). For priority projects, these ment had played a lead role in approving new invest- institutions have provided loans with interest rates up ments in the sector, and this frequently led to long de- to 10 % lower than the standard loan interest rates set lays before projects could begin. By devolving authori- by the Central Bank. These loans often come with an ty in this area, the NDRC has sought to reduce bureau- extended repayment period, in some cases as long as cratic hurdles for investors and to facilitate fast-track 10-15 years. approval for projects that integrate fast-growing plan- Loan interest subsidies are another important tations with pulp and paper production. According to form of incentive used by the government to achieve a recent study by the American Forest and Paper Asso- its policy targets in the pulp and paper sector.4 In- ciation, the State Council has also allowed provincial deed, the government has allocated loan interest sub- governments to „offer preferential conditions above sidies totaling US$ 2.13 billion (RMB 17.6 billion) to and beyond those stipulated in national policies (i. e. support the NDRC’s 13 high-priority pulp-paper and the authority to set tax rates, tax holidays, and fee plantation projects (AF&PA 2004). Under this sche- waivers offered to investors), in the hopes that they me, borrowers investing in priority projects are al- can attract more foreign investment“ (AF&PA 2004). lowed to forego interest payments on loans from sta- te-owned banks for a period of 2-3 years.5 Typically, CAPITAL SUBSIDIES FOR PLANTATION the Ministry of Finance will reimburse the banks in- DEVELOPMENT volved with funds from the central budget or raised from treasury bonds. In some cases, these incentives To ensure that China’s pulp producers have ade- not only allow borrowers to avoid interest payments quate supplies of wood fiber, the government has also but also to secure larger loans than they might other- promoted the development of industrial tree planta- wise obtain.6 tions. With the adoption of China’s Tenth Five Year In addition to promoting domestic investment in Development Plan, the State Forest Administration wood pulp production, the Chinese government has (SFA) prioritized the establishment of a fast-growing, sought to encourage foreign investment as well (SFA high-yielding (FGHY) plantation base by including 2002b). In March 2002, the NDRC included the fol- this as one of six core initiatives in the National Forest lowing in the government’s list of industry segments Protection Program (SFA 2002b). The central aim of where foreign investment through joint ventures is the FGHY plantation initiative is to expand the coun- encouraged: try’s commercial wood supply to support domestic forest industries, especially new capacity for wood z Wood base development for pulp and paper pro- pulp production. cessing; According to the SFA’s strategic plan for the forest- z Chemical pulp with annual capacity over 300,000 ry sector, the government has budgeted RMB 71.8 bil- Adt/yr; 7 lion – or US$ 8.6 billion – to finance the development z Mechanical pulp (CTMP, BCTMP, APMP) with annu- of 13.3 million ha of FGHY plantations during the al capacity over 100,000 Adt/yr; period 2001-2015 (SFA 2002a). Some 5.8 million ha, z High-grade paper and paperboard (except news- or approximately 45 % of the targeted area, is inten- print). ded to be used for fast-growing plantations for pulp- Significantly, the NDRC also devolved to provincial wood. governments substantial authority over the invest- The fast-growing plantation program covers four ment approval process for forestry and pulp-paper priority geographic regions: China’s south coastal re- gion; the lower and middle reaches of the Yangtze Ri- 4 During 1998-2002, for instance, the Chinese government ver; the lower and middle reaches of the Yellow Ri- provided loan interest subsidies totaling US$ 1.67 billion for technological improvements and capacity expansions at 21 ver; and Northeast China/Inner Mongolia. In aggre- state-owned paper mills. gate terms, the largest area allocated for pulpwood 5 AF&PA (2004) notes that „the standard subside term is 2 plantation development is in Northeast China/Inner years... [However] for enterprises found on the list of China’s Mongolia, where 2.4 million ha of plantations are top 520 enterprises, the subsidy term is 3 years.“ In at least planned to produce pulpwood fiber (see Table 1). one case – Shandong Chenming Co., Ltd – the borrower re- However, in the South Coastal and Yellow River re- ceived a loan interest subsidy for 5 years. 6 According to AF&PA (2004), „If a paper mill needs US$ 10 gions, the areas planned for pulpwood are substan- million for technology renovations, the Ministry of Finance tially larger relative to the total area allocated for would provide a 2-year loan interest subsidy totaling 1.2 mil- FGHY plantations than they are in the other two re- lion to start the project. In fact, with this government subsi- gions. dy, the company can usually receive a bank loan for up to 10 times the subsidy amount (US$ 12 million).“ The government has structured the FGHY pro- 7 CTMP refers to chemi-thermomechanical pulp; BCTMP is gram around 99 priority projects, which are eligible bleached chemi-thermomechanical pulp; and APMP is alka- to receive subsidized financing to encourage fast- line peroxide mechanical pulp. growing plantation development (SFA 2002a). Thirty- C. Barr and C. Cossalter 270

TABLE 1 FGHY plantation area targets by region, 2001-2015 Total FGHY for Pulpwood as % Region Provinces FGHY (ha) pulpwoof (ha) of total Guangdong, Guangxi, South coastal Hainan, Fujian 1.9 m 1.4 m 74 % Lower-middle Zhejiang, Jiangxi, Hubei, Yangtze River Hunan 3.0 m 1.3 m 43 % Lower-middle Hebei, Henan, Yellow River Shandong 1.0 m 0.8 m 80 % Northeast China/ Inner Mongolia, Liaoning, Inner Mongolia Heilongjiang, Jilin 7.2 m 2.4 m 33 % Source: State Forest Administration nine of these projects involve the development of met; moreover, there is little guarantee that the sites pulpwood plantations. Under the government’s plan, planted will achieve high levels of productivity on a development of these plantations will be subsidized sustained basis. through loan interest subsidies, discounted loans In many parts of the China, delivered wood costs from state banks, and extended repayment periods. are also substantially higher than those found in more Specifically, financing for priority fast-growing plan- efficient pulp-producing countries. As discussed in tation projects will come from four sources: detail below, delivered wood costs in South China cur- rently range between US$ 20-25 per tonne for euca- z State-owned banks will provide 70 % of the overall financing for the FGHY program – or approximate- lyptus from state forest farms and US$ 30-40 per ton- ly US$ 6.1 billion – in the form of discounted loans ne for eucalyptus grown on collectively owned land to state forest farms, private sector plantation com- that is either managed by farmers’ cooperatives or lea- panies, and farmers’ cooperatives. The China Develop- sed from local communities by plantation companies ment Bank and the Agricultural Bank of China, in (Cossalter 2004a; 2004b). By contrast, pulp produ- particular, will provide loans with reduced interest cers in Indonesia are reported to pay US$ 12-25 per rates and an extended 10-15 year repayment period. tonne for „mixed tropical hardwoods“ harvested from the natural forest and for plantation-grown Acatia z The Ministry of Finance will allocate 20 % of the FGHY program’s total financing – or approximately mangium. In Brazil, where highly efficient eucalyp- US$ 1.7 billion – through loan interest subsidies. tus plantations have been developed near the major mill sites, some producers report delivered wood z Local governments are responsible for providing 3 % 8 of the program’s financing. costs as low as US$ 5-15 per tonne. The relatively hig- her wood costs in China can generally be attributed to z Plantation companies receiving the discounted go- vernment finance are responsible for contributing 7 % the substantial cost involved in leasing land; high tran- of their project’s financing from their own funds or sport costs resulting from poor infrastructure and the from commercial sources (SFA 2002a; AF&PA 2004). dispersed nature of small-holder plantation sites; and the need, in many areas, for heavy fertilizer inputs to LIMITS ON CHINA’S COMPETITIVENESS compensate for poor soil conditions (Cossalter 2004a). Given this disparity in wood costs, many analysts In spite of the heavy capital subsidies being allocated, question whether China-based pulp producers can, in China faces significant constraints which are likely to fact, compete with low-cost producers in Indonesia limit the competitiveness of a domestic wood pulp in- and Brazil – in spite of the considerable distance re- dustry. In particular, many analysts caution that it is quired to ship pulp from those countries to China important to remain sober-minded about the govern- (Asprem et al. 2004; Wright 2004). Moreover, some ment’s capacity to develop a high-quality fast-growing analysts anticipate that the world will face a growing plantation resource base on the scale planned under oversupply of market pulp over at least the medium- the FGHY program (URS Forestry 2003; Jaakko Pöyry term, which would place further downward pressure 2001). Past experience has shown that large-scale on global pulp prices. Hawkins Wright, for instance, plantation development initiatives in China have fre- projects that global production capacity for market quently been very effective at getting large areas of pulp will increase from 47.9 million Adt/yr in 2003 to trees planted on an annual basis. However, it is not un- 56.4 million Adt/yr in 2008 (Wright 2004). This ex- common for a significant portion of these areas to ha- ve low levels of productivity due to infertile soils, in- 8 The figures for fiber costs in Indonesia were reported by adequate site management, poor stocking and/or the pulp and plantation companies in Riau, Jambi and South Su- use of inferior genetic materials (Jaakko Pöyry 2001). matra during company visits by the authors in February and March 2003. Those for Brazil were reported by pulp and It remains to be seen whether the planting targets for plantation companies in Bahia, São Paulo, and Paraná states the FGHY program over the next several years will be during March 2004. 271 China’s development of plantation-based wood pulp industry pansion is expected to outpace growth in global de- either actively considering and/or initiating the deve- mand for market pulp, which is projected to rise from lopment of large-scale hardwood pulp mills in the re- 44.8 million Adt/yr to 51.0 million Adt/yr during the gion (Figure 1). Reports of what these companies are same period. considering, and the status of their plans, have varied As China consumes nearly 50 % of the world’s mar- widely and have changed over time. As Table 2 shows, ket pulp, global oversupply could mean that China- however, these producers have either conducted fea- based pulp producers become increasingly reliant on sibility studies or initiated development for five pulp either direct or indirect government subsidies to re- mills with a combined capacity of 5.6 million Adt/year main competitive within their home markets (Barr over the medium to long term. and Cossalter 2004). However, with China’s entry in- Few analysts expect that all five of these mills will to the World Trade Organization, the government will be developed or that the region’s installed wood pulp find it increasingly difficult to provide such subsidies production capacity will approach 5.6 million Adt/ and can no longer protect domestic producers with year in the near future. Indeed as of January 2005, import tariffs as it has in the past (Roberts 2004). only one of the projects under consideration – APP’s Hainan Jinhai mill, which began test trials in Novem- PULP AND PLANTATION DEVELOPMENT IN SOUTH ber 2004 – had even initiated construction, much less CHINA started production. On the contrary, in late-2004 UPM-Kymmene announced that it had withdrawn The provinces of Guangdong, Hainan, and Guangxi, from the planned Fuxing pulp mill project in western located along the country’s southern coast, currently Guangdong Province (which will be discussed in represent the most active region for the development greater detail below). While the project may ultimate- of kraft pulp production in China. During the last ly go forward with another investor, the withdrawal three years, four of the world’s largest pulp producers of UPM-Kymmene will undoubtedly mean that the – including Indonesia-based Asia Pulp & Paper (APP) Fuxing mill is delayed significantly, if it is built at all. and RGM International and Finland-based Stora Enso Stora Enso has also indicated that it is now in the pro- and UPM-Kymmene – have announced that they are cess of restructuring the industrial concept for the

FIGURE 1 Development of hardwood-mills in the region C. Barr and C. Cossalter 272

BHKP mill it had planned for Guangxi Province. APP Each of the planned mills has structured its wood has, likewise, indicated that it is planning to develop supply strategies around the development of fast- a bleached hot-grind mechanical pulp mill with a ca- growing eucalyptus plantations. The main species pacity of 300,000 Adt/yr as a first stage for its project being used are Eucalyptus urophylla, E. tereticornis in Guangxi’s Qinzhou Prefecture.

TABLE 2 Wood-based pulp mills (capacity > 500.000 Adt/year) planned for South China, as of December 2004 Planned/proposed Project name Province capacity (Adt/yr) Status (December 2004) Pulp line 1 with 1.1 million Adt/yr installed - test trials held in APP Hainan Jinhai Hainan 2,400,000 November 2004 Approval pending for first phase APP Qinzhou Guangxi 1,200,000 of 300,000 Adt/yr Approval pending - however, Stora Enso is considering a new industrial concept while studying feasibility Stora Enso-Hepu Guangxi 600,000 of plantation resource base Status uncertain - UPM Kymene with- Fuxing Guangdong 700,000 drew from project in November 2004 RGM-Xinhui Guangdong 700,000 Proposed - not yet approved Total 5,600,000

TABLE 3 Effective wood demand and approximate net plantation area needed according to potential pulp capacity levels Net plantation area needed MAI = 12 MAI = 15 MAI = 18 Pulp capacity (Adt/yr) Wood demand (m3/yr) m3/ha/yr m3/ha/yr m3/ha/yr 1,000,000 4,150,000 432,000 346,000 288,000 1,500,000 6,225,000 648,000 519,000 432,000 2,000,000 8,300,000 864,000 692,000 576,000 2,500,000 10,375,000 1,080,000 865,000 720,000 3000,000 12,450,000 1,296,000 1,038,000 864,000 3,500,000 14,525,000 1,512,000 1,210,000 1,008,000 4,000,000 16,600,000 1,728,000 1,383,000 1,152,000 4,500,000 18,675,000 1,944,000 1,556,000 1,296,000 5,000,000 20,750,000 2,160,000 1,729,000 1,440,000 5,500,000 22,825,000 2,376,000 1,902,000 1,584,000 6,000,000 24,900,000 2,592,000 2,075,000 1,728,000 Note: Wood demand is based ont he assumption that 4.15 m3 of roundwood (solid wood under bark) is needed to produce 1.0 Adt of pulp. Approximate net plantation area is based on the assumption that plantations are managed on a 5 year rotation; and 20 % of harvested volume is non-commercial. In spite of the uncertainties involved, the ambi- (12ABL Congo) and a number of eucalyptus hybrids tious plans and large-scale investments already being including: Eucalyptus grandis x E. urophylla; E uro- made in hardwood pulp production in South China phylla x E. grandis; E. urophylla x E. tereticornis, raise a number of critical questions about the region’s which are well-suited for the growing conditions fiber resource base. Most significantly, perhaps, how found in much of Hainan, Guangdong, and Guangxi. much pulpwood fiber can the region’s plantations Large areas of eucalyptus have, in fact, been planted in supply on a sustainable basis ? And how much land the three provinces over the past decade, and clonal will be required to do so ? If it is assumed that 4.15 forestry has now become widely used. Based on pro- cubic meters (m3) of pulpwood (solid wood under vincial forest inventory figures, it is estimated that by bark) are needed to produce 1.0 Adt of pulp, it can be the end of 2002, the three provinces had approxi- estimated that some 4.15 million m3 of pulpwood will be needed annually to support every 1.0 million ton- mately 750,000 ha of standing eucalyptus plantations nes of pulp capacity that is brought online. Table 3 (Cossalter 2004a). However, at least a portion of these shows the projected wood demand of the region’s have been planted for environmental purposes and pulp producers at various levels of installed capacity, are not likely to be available for commercial use. In re- and the approximate land area that would be needed cent years, the region’s plantations have expanded at to supply the volumes of wood if these were to be ob- approximately 65,000 ha annually. Growth rates and tained from local plantations. productivity levels in South China are highly variable, 273 China’s development of plantation-based wood pulp industry with mean annual increments (MAI’s) generally ran- to the mill at the prevailing market price. ging between 10 and 20 m3/ha/yr depending on site A third model is structured as a production-shar- conditions and plantation management practices ing arrangement between the pulp company and the (Cossalter 2004a). local community or land-owner. The pulp company

TABLE 4 APP’s annual planting of pulpwood plantations in Guangdong, Guangxi, and Hainan Provinces, 1995-2003 (hectares) Year Guangdong Guangxi Year Hainan 1995-1996 1,771 6,069 2,495 1996 0 1996-1997 7,380 7,012 7,623 1997 6,680 1997-1998 884 1,607 3,230 1998 0 1998-1999 996 894 1,516 1999 9,346 1999-2000 468 0 8,811 2000 30,733 2000-2001 0 0 2001 0 2001-2002 0 0 est. 16,000 2002 0 2002-2003 0 0 2003 16,768 Total 11,499 15,582 est. 39,675 Total 63,527

Source: APP, January 2003 and June 2004, for figures on Guangdond and Guangxi; Hainan Province Forestry Bureau, May 2004, for figures on Hainan.

Over the last few years, pulpwood plantations in assumes full responsibility for financing the planta- South China have produced approximately 2.0 mil- tion development on community land, and the com- lion m3/yr of small-diameter logs which have been ex- munity is responsible for managing the site. At the ported in the form of wood chips, principally to Ja- end of the rotation, the wood harvested is divided be- pan, South Korea, and Taiwan. Smaller volumes have tween the company and the community according to been used by a handful of plywood and medium-den- an agreed ratio. Often the company provides a guar- sity fiberboard (MDF) mills, as well as a few medium- antee that it will purchase the community’s portion of scale pulp and paper mills located in southern China, the wood at a pre-determined price. and in one case, in Shandong Province. Under a fourth model, pulp companies are seeking At present, the sponsors of each of the planned to secure wood procurement contracts with the re- pulp mills are competing with one another to secure gion’s state-owned tree farms, which have fairly sub- an adequate land base for their respective plantation stantial existing plantation areas. The following sec- development initiatives. Due to the population densi- tions examine the fiber supply strategies of two major ty in South China, much of the suitable land is already pulp mill projects that have been planned for the re- held by local communities and individual farmers. gion: APP’s Hainan Jinhai pulp mill and the Fuxing Pulp companies are therefore seeking to gain access pulp mill project. These projects are each included on to plantation land by establishing partnerships with the list of 13 high-priority pulp and paper projects these groups, often with the assistance of provincial prepared by the National Development and Reform and municipal governments, and they are using a Commission. Much of the information presented be- number of different models to do so (Cossalter 2004a; low was obtained during company visits and field Lu Wenming et al. 2002). Under one such model, studies in Hainan and Guangdong conducted during companies are leasing land from local communities – February, March, and September 2003 and May, June, for periods that sometimes range up to 30 years – and and August 2004. then establishing and managing the plantations them- selves. The company typically assumes full responsibi- APP’S HAINAN JINHAI PULP MILL PROJECT lity for financing the project and makes annual pay- ments to the community, but manages the site directly. Hainan Jinhai Pulp & Paper Co. Ltd is a subsidiary A second model is structured around a joint fi- company of APP China and the sole shareholder of nancing arrangement between the pulp company and the group’s Hainan pulp mill. This new mill is located a private investor although again, the plantations are at Yang Pu on the west coast of Hainan Province ap- developed on land that is leased from communities. proximately 110 km from , the provincial capi- Un-der this model, the pulp company and the private tal. The mill site covers an area of 400 ha within the re- investor generally share the cost of plantation devel- cently created Yang Pu Free Trade and Economic De- opment, and the latter assumes responsibility for velopment Zone, and has its own port facilities. Con- mana-ging the site, harvesting the wood, and deliver- struction of the mill was completed in October 2004 ing it to the mill site. Typically, the pulp company re- and test trials began in late-November. ceives a predefined portion of the harvest, while the According to company announcements, APP’s Hai- private investor retains the right to sell the remainder nan Jinhai mill has initiated production with an in- C. Barr and C. Cossalter 274 stalled capacity of 1.1 million Adt/yr for bleached na as a whole, Guangxi is where eucalyptus planta- hardwood kraft pulp. The company plans to expand tions are expanding most rapidly, with approximate- capacity to1.2 million Adt/yr by mid-2005 after debot- ly 40 000 ha of new plantations being established tlenecking. This is the first step of a larger project annually in recent years. The provincial government’s which will reportedly include the addition of a se- target is to establish approximately 670 000 ha of fast- cond pulp production line of the same capacity and growing, high-yielding plantations linked to proces- of two paper lines of 1.6 million tonnes each. Accor- sing industries, particularly to pulp mills. The most ding to company plans, the Yang Pu project will have significant plantation development has occurred in a total installed capacity of 2.4 million Adt/yr of BHKP the coastal region, where APP and Stora Enso are de- and 3.6 million tonnes of paper once it is completed. veloping plantations in 38 counties. To support their The mill’s fiber supply strategy has largely been struc- proposed mill projects, the two companies have plan- tured around the development of eucalyptus planta- ned an aggregate plantation area of 950 000 ha. A tions in the South China region. As Table 4 shows, APP number of other companies – including Oji Pulp & has invested in fast-growing plantations in Guang- Paper, Jahan Forest Products (Sino Forest Group), dong, Guangxi and Hainan provinces since 1995. In Feng Lin, Gao Feng Group, and Guangxi Plantation making these investments, APP has sought to initiate a resource base in the neighborhood of sites that it Development Company – are also developing new had pre-selected for several potential pulp and fiber plantations in the southern and south-central parts of board industries. Several of those proposals have fai- the province. led to obtain final agreement, and it now appears that The coastal region of Qinzhou, where most of the the group will direct the wood from these sites to the APP plantations in Guangxi are being established, is Hainan mill, at least until other potential production separated from the site of the Hainan mill by the Gulf facilities come online. By the end of 2003, APP had es- of Tonkin. Topography in this region consists of gen- tablished approximately 130 000 ha of plantations, tly undulating hills. In most cases, the new eucalyptus mostly composed of eucalyptus, in the three provinces. plantations have expanded on areas classified as ,wasteland‘ or have replaced sugar cane fields with APP’s Guangdong plantations low productivity. Soils are shallow and, as in western Guangdong, most sites have nutrient deficiencies. All In Guangdong Province, APP has planted an area of of APP’s plantations in this area have been established about 27 000 ha in Qingyuan and Shaoguan prefec- with eucalypt clones. According to APP officials, the tures, located respectively at 120 km and 300 km company expects the MAI for these sites to be approx- northwest and north of . They were large- imately 15 m3/ha/year. Until now, the entire expan- ly established during 1995-1998 as part of an overall sion of APP’s plantations has been on land where plan to build a total plantation resource of 330 000 ha communities and individual farmers hold user rights, in Qingyuan and 400 000 ha in Shaoguan. The origi- nal purpose of these plantations was to supply two the so-called ,collectively-owned‘ land and ,farm land proposed pulp and medium density fiberboard mills. allocated to households‘. In perhaps 90 % of all cases, In both cases, the Bei Jiang River was expected to pro- APP has planted these lands on the basis of land lease vide the water supply to the mills and to drain their ef- contracts signed with the recognized users. fluents. In 1997, however, the provincial administra- tion withdrew its initial agreement allowing APP to APP’s Hainan plantations proceed with the construction of the two mills. The provincial administration’s key concern was the high In 1997, APP and the Hainan Forestry Bureau, created risk of water pollution of the Bei Jiang River, one of a joint venture through their respective subsidiaries, the main supplies of drinking water of the city of Hainan Jinhai Pulp & Paper Co. and the Hainan Pro- Guangzhou. vince Forestry General Corporation. This joint ven- At this point, it is not altogether clear how APP will ture, named Hainan Jinhua Forestry Corporation Ltd, use the wood from the Guangdong plantation sites. was established with the objective of building a plan- The Qingyuan and Shaoguan plantations are far too tation base of 3.5 million mu – equivalent to 233 000 remote to become an economic source of wood for ha (15 mu = 1 ha) – for the Yang Pu mill. Within the the Hainan mill on a long-term basis. Road conditions joint venture, the specific task assigned to the Hainan north of Guangzhou are rather poor and access to the Province Forestry General Corporation has been to Guangzhou harbor is already extremely congested. make land available, while APP’s Hainan Jinhai Co. has However the possibility that the wood from these been responsible for financing and managing the plan- sites could be delivered to the Hainan mill, at least du- tation development. According to APP’s projections, ring the mill’s start-up phase, should not be excluded. the partnership’s future plantations are expected to cover approximately 180,000 ha of ,collectively-ow- APP’s Guangxi plantations ned‘ land and ,farm land allocated to households‘, Through the end of 2003, APP had planted approxi- while the remaining 53,000 ha would be provided by mately 40 000 ha in Guangxi Province. For South Chi- the provincial network of state-owned agriculture 275 China’s development of plantation-based wood pulp industry farms and state-owned forest farms.9 nan’s existing plantations of eucalyptus, acacia and Between 1997 and 2003, the Hainan Jinhua Forest- casuarina, which produce approximately 600,000 m3 ry Corporation planted a total area of 63,530 ha (Tab- of wood on a yearly basis. These include areas plan- le 5). Over 80 % of this expansion has taken place on ted through government-funded projects and, since ,collectively-owned‘ land and ,farm land allocated to 1993, plantations established by private forestry com- households‘ in 18 counties. Eucalyptus is the primary panies.10 Two local MDF mills use approximately one- genus used, although areas that are not suitable for eu- third of this production, while the rest is processed calyptus were planted with acacia, casuarina and pi- into wood chips and shipped to Japan, South Korea nes. Planting peaked in 2000 with over 30,000 ha es- and Taiwan. It is estimated that about one-half of the tablished during that year, before being suspended in annual production potential of the Hainan planta- 3 2001 and 2002 due to the APP group’s financial diffi- tions grown for fiber (i. e. 300 000 m /yr) could be re- culties. routed, through contractual agreements, to the Yang TABLE 5 APP’s annual plantation establishment in Hainan Province, 1997-2003 (hectares) Plantation model 1997 1998 1999 2000 2001 2002 2003 Total State owned farms 2,370 0 1,255 6,462 0 0 0 10,087 Collective land 4,310 0 8,091 24,271 0 0 16,768 53,440 Total 6,680 0 9,346 30,733 0 0 16,768 63,527 Source: Hainan Province Forestry Bureau, May 2004.

In developing its plantation resource base, APP is Pu mill. This represents approximately 7.5 % of the to- implementing several models through which farmer tal wood volume required by the mill during its first cooperatives and individual households grow wood year of operation. fiber on their own land. Land leasing has become the most common practice throughout the province, as Fiber balance this is the partnership model that contains the least uncertainty and the lowest risks for the leaser. Con- APP will need a total area of approximately 360,000 tracts are signed for a minimum period of 12 years, ha of plantations to sustain its Hainan pulp mill at a but in some cases can last for 30 years. capacity of 1.2 million Adt/yr (Cossalter 2004a; 2004b). To some extent, APP’s efforts have been hindered This would provide some 72,000 ha that could be har- by the fact that there has been little spontaneous en- vested annually, assuming that sites were managed on gagement of local communities and individual far- a five year rotation. This should be adequate for gene- mers towards short-rotation plantations in Hainan. rating the 5.0 million m3 of wood needed to fully sup- One reason for this is that until recently, there has ply the mill at current growth rates. been very limited local demand for small-diameter logs We estimate that the 130,000 ha of APP plantations or wood chips. In addition, two companies under the already in place in the three provinces would be able authority of the provincial government share a mono- to deliver approximately 7.3 million m3 of pulpwood poly on wood chip exports. Consequently, prices of- during the first five years of operation of the Hainan fered to Hainan producers are often 20-25 % lower mill (i. e. 2005-2009). If, during this period, the total than prices paid to producers in western Guangdong, pulp output is 6.0 million Adt, the mill would require where buyers purchase fiber in a competitive market. approximately 25 million m3 of wood. It is likely that In addition to leasing land from local communi- at least 17 million m3 of this – or more than two-thirds ties, APP has also sought to secure wood from Hai- of the total volume of fiber consumed by the mill – will have to be sourced from external suppliers. The 9 According to data provided by APP, the company expects that: (i) 15 % (approximately 35,000 ha) of the entire Hainan Hainan mill’s fiber shortfall will be considerably grea- plantation program will be located on volcanic red soils cha- ter if APP chooses to raise capacity further by instal- racterized by high clay content and relatively good fertility; ling a second pulp production line or moves ahead (ii) 50 % (approximately 116,500 ha) on the granites soils of with plans to build a second pulp mill in Guangxi pro- the foothills in the central region, which are of variable fer- vince. tility; and (iii) the remaining 35 % (approximately 81,550 ha) Part of this shortfall could, in principle, be met by on the sedimentary infertile sands. South China’s inter-provincial trade.11 Until this year, 10 The history of fast-growing plantation development in Hainan the region’s three provinces have exported the equi- is relatively recent and all the areas planted until 1993 were valent of 2.3 million m3 of wood annually in the form through government-funded projects. After 1993 several in- of wood chips. Only a very small share of this market dustries started to invest in tree plantation. A joint venture is bound by long-term contracts, and it is possible that between a private enterprise named Korean Wood Chips Company and the Hainan Province Forestry General Corpo- a significant portion of the fiber exported could be ration (a subsidiary of the Provincial Forestry Bureau) was created to plant casuarina trees. The Wuzhishan Group started 11 See Cossalter 2004a and 2004b for a more detailed analysis planting Caribbean pine for resin production. Also two MDF of the potential effects that APP’s fiber demand could have plants started building up their own eucalyptus resource base. on South China’s wood chip trade. C. Barr and C. Cossalter 276 redirected to APP’s Hainan mill or other pulp produc- THE PROPOSED FUXING PULP MILL PROJECT tion facilities that may come online. However, APP’s access to this wood will depend on its willingness to The proposed Fuxing pulp mill project had, until very offer prices that are competitive with those offered recently, been designed as a joint venture involving by Japanese, Taiwanese, and South Korean importers. China’s Ministry of Planning (which held 45 % of total It is also conceivable that APP will seek to ship in shares), Finnish multinational UPM Kymmene (45 % of wood from Yunnan Province, where it has forestry o- total shares) and Guangdong’s provincial government perations, and/or from other countries in the region (10 % of total shares). The proposed mill was to be lo- where it has timber and plantation concessions, such cated on the in the western por- as Indonesia or Cambodia. tion of Guangdong Province, about 30 km south of

TABLE 6 Areas of eucalyptus and acatia plantation in the four prefectures of western Guangdong Province (hectares) Prefecture Age class Total Young Intermediate Nearly mature Mature Overmature Zhanjiang 38,615 29,782 18,592 11,330 40,870 139,189 4,467 7,121 8,829 7,602 1,871 29,890 2,199 3,350 2,434 1,449 8,328 17,760 9,079 6,009 3,792 4,322 5,405 28,607 Total 54,360 46,262 33,647 24,703 56,474 215,446 Source: Forestry Department of Guangdong Province, November 2004.

Land and wood costs the city of Zhanjiang. The project had been designed to produce bleached hardwood kraft pulp from plan- In the north-west part of Hainan, leasing land that is tation-grown wood, particularly eucalyptus. Accor- not suitable for agriculture costs approximately RMB ding to project plans, the mill would have an initial 30-55 per mu on an annual basis (equivalent to ap- production capacity of 700,000 Adt/yr of BHKP, proximately US$ 55-100 per ha per year) depending which corresponds to an annual wood demand of 2.9 on the location, topography and soil fertility. Land lea- million m3. se prices on the province’s east coast are no less than Initial plans were to launch the mill’s production RMB 70 per mu per year (US$ 130 per ha per year) in 2006. However, the project encountered delays since soils are more fertile and there is more demand due to the government’s lengthy approval process for agricultural land. In August 2004, APP officially an- and efforts by the project sponsors to obtain guaran- nounced its new land lease policy for Hainan. A year- tees that sufficient volumes of fiber would be availa- ly payment at 30 % above the current market price ble at an economically viable cost on a sustainable would replace the company’s earlier practice by basis. In November 2004, UPM Kymmene announced which the totality of the lease was paid up-front for that it had decided to withdraw from the project alto- the entire contract duration. In addition, a special gether. In its public statement concerning this deci- premium of RMB 70 per (US$ 130 per ha) will be mu sion, UPM implied that its withdrawal was based on paid each year during the first five years of lease for concerns about the availability and cost of wood fib- land that could be used for agriculture. er in the region surrounding the proposed mill.12 A simulation based on current practices indicates As of January 2005, the future of the Fuxing pulp that costs for plantation establishment and mainte- project remains unclear. It is possible that China’s nance are higher at most Hainan sites as compared to national government and/or the Guangdong provin- those found in western Guangdong (as discussed be- cial government will seek to proceed with the project low). One reason for this is that tree growing in Hainan if it can find an investor willing to replace UPM Kym- requires greater expenditures for fertilizer. This is es- mene. To have a realistic chance of doing so, however, pecially true for the north-west part of the province, the government will need to ensure that a sufficient which is close to the mill. Provincial forest farms u- resource base of fast-growing plantations would be sing their own land can produce pulpwood with stum- available to the pulp mill if it were built. The following 3 page costs of US$ 10-15 per m and costs at mill gate sections review the fiber supply strategy that had ranging between US$ 20-25 per tonne for a transport been formulated for the planned mill when UPM was distance of 100-150 km. However, the land availabili- ty of these government farms is extremely limited. If 12 In a statement posted on the company’s website on Novem- land has to be leased at costs ranging between RMB ber 17, 2004, UPM offered only the following explanation: „Ac- 30-55 per mu per year (US$ 55-100 per ha per year), cording to a letter of intent signed in 2003, the task of the 3 joint venture company was to investigate and make prepara- stumpage costs come close to US$ 20 per m and the tions for wood supplies for a possible future pulp mill. The range of production costs (compounded at 6 % inte- decision to withdraw was made after studies of the local rest rate) at mill gate is between US$ 30-40 per tonne conditions and the availability and cost of wood for a modern for a transport distance of 100-150 km. large-scale mill.“ 277 China’s development of plantation-based wood pulp industry still involved, and outline many of the issues that ned to develop 50,000 ha of ,self-managed‘ planta- would need to be addressed for the project to go for- tions on land that would be leased within Zhanjiang ward. and Maoming prefectures. The average distance to the proposed mill from these sites is 85 km. These Fibre supply and plantation development plans plantations also were to have been used as a demon- stration area for extension purposes, a base where According to the project’s original plans, the planta- outside tree growers could learn how to improve the tion base for the proposed Fuxing pulp mill would be cultural practices and plantation yields on their own located in the four most western prefectures of Guang- land. dong, namely: Zhanjiang, Maoming, Yangjiang and ,Contracted‘ plantations – Fuxing-UPM Kymmene Jiangmen. Approximately 220,000 ha of eucalyptus had planned to enter into long-term procurement plantations currently exist in these four prefectures, although at least a portion of these have been develo- contracts with the ,owners‘ of 60,000 ha of existing ped for ecological purposes and will not be available plantations. This was to include a number of existing for commercial use (Table 6).13 forestry and agricultural farms located in several These plantations have a total annual production counties (municipalities) of the four prefectures of capacity of roughly 1.8-1.9 million m3. They currently western Guangdong. Most of these farms are state- supply approximately 350,000 m3 of wood fiber to owned forest farms and are managed either by prefec- two local MDF mills and a fiber board mill. Their an- ture or county forestry or agriculture bureaus. Accor- nual output also consists of 500,000 bone dry tonnes ding to the proposed plan, the current farm owners (Bdt) of wood chips which are exported, and an addi- would continue to manage the plantations under con- tional 150,000-200,000 Bdt of chips sent to the Rizhao tracts to the mill. These contracts were to include a pulp mill in Shandong Province, north of .14 protection clause that would set a minimum price for A smaller portion of the production goes to local ply- the purchase of pulpwood. The company also plan- wood mills. It is estimated that about one-half of the ned to stipulate that the Fuxing mill would purchase eucalyptus harvested from these existing plantations its wood at the local market price whenever the mar- could, in principle, be redirected – through contrac- ket price was higher than the agreed contractual tual agreements – to the Fuxing mill in Zhanjiang, if it price. The average distance of the ,contracted‘ planta- were built. This assumes, however, that future wood pri- tions to the mill would be approximately 135 km. ces would not be lower than those offered by Japa- ,Membership‘ plantations – According to the initial nese and South Korean importers. project plan, Fuxing-UPM Kymmene intended to work According to the initial project plan for the Fuxing with the four prefectures of western Guangdong, pulp mill, substantial investments would be needed to county governments and forest bureaus to develop develop new areas of eucalyptus plantations above 90,000 ha of pulpwood plantations through an out- and beyond those that currently exist in western grower program involving farmer and village land. Guangdong. The mill’s fiber supply strategy was to be Under this scheme, members of the outgrower pro- based upon the development of 200,000 ha of planta- gram and the pulp company would sign a contract tions under three different models: ,self managed‘, through which the latter would provide loans and ,contracted‘, and ,membership‘ plantations. technical assistance in exchange for a share of the fu- ,Self-managed‘ plantations – These plantations were to ture wood harvest. The contract would also give the be established and managed by a company affiliated pulp company a priority right to purchase any addi- with Fuxing-UPM Kymmene, and would have formed tional wood production, above the specified share, the mill’s core raw material area. The company plan- from the partner tree growers. It was expected that the ,membership‘ plantations would be located at an avera- ge distance of 130 km to the mill. 13 There are a number of ecological and geographical features that have favored plantation development in western Guang- Most of the project’s ,self-managed‘ and ,contracted‘ dong. The region’s humid tropical climate is well-suited to plantations were to be managed on a five-year rota- tree growth and particularly to some of the fastes growing eu- tion period and would use clones of Eucalyptus uro- o calypts. The annual mean temperature is 23.5 C. Absolute phylla and E. 12ABL (a variety of E. tereticornis bred recorded maximum and minimum temperatures were respec- tively 38.8 oC and -3.0 oC. The annual mean precipitation is in the People’s Republic of Congo) as planting mate- 1,800 mm. Topography in the coastal area where eucalyptus rial. The minimum stand size would be 100 mu (be- plantation are grown consists of plains and gently undula- tween 6.5 and 7.0 ha). On most sites, the mean annual ting tablelands easily accessible to vehicles and heavy ma- increment of the existing eucalyptus plantations of chinery used for forest work. In addition, a dense network of western Guangdong ranges between 10 and 20 m3/ well maintained national and secondary roads is already in ha/year, depending on site quality and management place in the region. Zhanjiang is also connected to the cen- tral and eastern part of Guangdong province as well as to the neighboring province Guangxi by rail. Finally, the four pre- 14 1.0 BDt of wood chips is equivalent to approximately 2.1 m3 fectures cities have their own sea port. of debarked wood (sub). C. Barr and C. Cossalter 278 practices. The sponsors of the Fuxing mill project ex- China and/or through wood chip imports. Of perhaps pected that their future plantation base would have far greater concern to the project sponsors is the fact an average increment of 18.5 m3/ha/year to be able to that competition for land in western Guangdong deliver an average of 14 m3/ha/year of commercial would make it very difficult to develop a plantation wood.15 resource base for a second pulp production line, if they chose to expand the mill. If, for instance, the pro- Fibre balance ject sponsors were to raise the mill’s capacity to 1.4 million Adt/yr, they would need to develop a planta- According to the project’s original plan developed in tion base of approximately 400,000 ha. Moreover, as 2002, the sponsors of the proposed Fuxing pulp mill the following sections explain, plantation develop- foresaw modest fiber shortfalls during the first few ment in western Guangdong also faces greater risks years of the mill’s operation, which was initially sche- and higher costs than are commonly recognized. duled for 2006. To gain insights into UPM’s recent de- cision to withdraw from the project, we have reas- Significant risk factors sessed those projections based on what we believe would have been the most optimistic scenario for the The main uncertainty regarding the development of project had it gone forward (Cossalter 2004b). This the proposed fiber resource base lies in the extent to reassessment is based on the assumptions that the which farmers would agree to participate in the mill would begin operating by 2008 and that the asso- ,membership‘ plantation scheme. Western Guang- ciated plantation development plan, as described dong has a rural population of 10.5 million people, of above, would be fully implemented but delayed by which 4.1 million reside in Zhanjiang prefecture. Per one year. capita area of arable land and forestland are respecti- 2 2 According to these calculations, the mill could be vely 1.08 mu (720 m ) and 1 mu (670 m ) is approxi- expected to produce an aggregate of 1.015 million mately, and farmers rely heavily on their land for their tonnes of pulp during its first two years of operation daily subsistence and income. Consequently, a far- (i. e. 2008-2009). This would require approximately mer’s decision to plant eucalyptus on his/her limited 4.2 million m3 of pulpwood (solid wood under bark). land area would mainly depend on the comparative benefits associated with growing eucalyptus wood The mill would likely have been able to secure some rather than fruit trees or sugar cane. 3.7 million m3 of wood from plantations associated Recent years have seen the proliferation of wood with the project during that two-year period, while chip plants in western Guangdong in response to approximately 500,000 m3 would need to be obtained strong demand and high prices offered on the export from outside sources. market. Local chip producers are buying eucalyptus Similarly, during the ensuing five years of opera- wood at attractive prices – up to US$ 36.5 per tonne tion (i. e. 2010-2014), the mill could be expected to at mill gate in September 2003 and up to US$ 40 in produce some 3.46 million tonnes of pulp, requiring 3 August 2004 for wood without bark and with diame- an aggregate of approximately 14.4 million m of pulp- ter ranging between 3 and 8 centimeters (cm). This wood. During this period, plantations associated with has led to a sharp increase in private investment in eu- the project would likely be able to generate 13.0 mil- calyptus plantations on community and farmer lands 3 3 lion m , leaving a shortfall of some 1.4 million m . As- in recent years. Much of this investment has been ma- suming that they produced a commercial MAI of 14 de by local entrepreneurs developing plantations on m3/ha/year on an industrial scale, it is reasonable to so-called ,wastelands‘ leased from communities. Also, expect that after 2014 the 200,000 ha of fast-growing there have been cases of farmers converting their sugar plantations that were to be developed would be able cane fields into eucalyptus plantation. to supply the Fuxing mill’s entire fiber demand – at an Within this context, managers of local plantations installed capacity of 700,000 Adt/yr – on a sustainable and wood chip plants fear that the government could basis. impose a limit on wood chips exports in order to for- It is quite conceivable that the relatively modest ce the re-routing of most of the current production to fiber shortfalls that the Fuxing mill would face in its the Fuxing mill, if it were built. Their concern is that first few years of operation could be filled through ex- a limit on exports would result in lower prices for the ternal purchases from plantation companies within wood chips used domestically, and this, in turn, would create disincentives for tree growers. Less favorable 15 The project sponsors reportedly expected that altogether, market conditions would lead many tree growers to the plantations located in the prefectures Zhanjiang and re-evaluate the levels of risk and uncertainty they are Maoming should be able to supply approximately 80 % of willing to accept. the mill’s needs on a sustainable basis at an installed capaci- Eucalyptus plantations in western Guangdong also ty of 700.000 Adt/yr. Their average distance to the mill face significant risks and constraints associated with would be approximately 90 km. Plantations in Yangjiang and Jiangmen would be located further away, at distances up to the region’s biophysical conditions. A large propor- 350 km. tion of the region’s soils have granites or sedimenta- 279 China’s development of plantation-based wood pulp industry ry infertile sands as parent material, and therefore, Land and fibre costs16 they often have low fertility and poor water-retaining capacity. It is estimated that 90 % of the area of exis- A simulation based on current practices and opera- ting plantations has nutrient deficiency problems. tion costs indicates that the stumpage costs of planta- Over the last 15 years, the widespread adoption of fer- tions established under the ,self-managed‘ model tilizers and micronutrient regimes, coupled with the would be on the order of US$ 22 per m3 (+/- 10 %). generalization of clonal forestry, has resulted in plan- The cost at mill gate of ,self-managed‘ wood would tation yields more or less doubling. At present, pur- amount to US$ 35 per tonne (+/- 10 %) for an average chase of fertilizers may account for 35-40 % of the to- transport distance of 85 km between the plantation tal plantation establishment and management costs. sites and the mill. The other parameters used for this Further progress is expected when new clones which simulation included: are more efficient in the use of scarce water and nu- z A land lease cost of RMB 80 per mu and per year trient soil resources become available. However, we (equivalent to US$ 148 /ha /year) payable on a year- estimate that the overall poor soil characteristics will ly basis; remain the most important constraint to further im- 3 z Production of 70 m /ha of commercial wood at the provement of plantation growth in the region. end of the 5-year rotation; Typhoons represent another risk factor in western Guangdong which has been largely underestimated. z General overhead costs of the ,self-managed‘ planta- Typically, they come from the east between July and tion estimated to be 8 % of its direct production September. Meteorological statistics show that be- costs; tween 1979 and 2001, there were 45 typhoons in the z A 6 % rate of interest for calculating the compoun- region: six had winds exceeding force 12 on the Beau- ded production costs. fort scale; 29 had winds between force 8 to 11; 10 had Most of these parameters were also used for simula- winds below force 8. There is a risk of at least one ty- ting the costs of wood to be produced under the ,con- phoon above force 8 every year causing breakage a- tracted‘ plantation model, the only exceptions being mong young trees and exposing wounded trees to di- the cost of overhead (raised to 12 %) and the average sease infection. There is also a risk of an entire age- transport distance (raised to 135 km). We have also as- class being knocked down every 7-8 years by a force sumed the absence of a land lease fee for the ,con- 11-12 typhoon. Eucalypts are particularly exposed tracted‘ model, due to the fact that the farms involved between ages 2 and 3. in this type of arrangement – state-owned farms, in Another significant risk factor is the general lack most cases – will generally use their own land. Stum- of genetic diversity in the region’s plantation base. Sin- page costs in this case would be on the order of US$ ce the late-1980s, substantial investments have been 10 per m3 (+/- 15 %). Average costs, not including the made to develop tree breeding and clonal forestry in farm’s profit, for wood delivered at the Zhanjiang mill western Guangdong. This has involved the testing of gate would amount to approximately US$ 24 per a large number of eucalyptus species and provenances, tonne (+/- 10 %). the establishment of seed orchards, the synthesis of The same simulation approach was used to esti- new breeds through controlled pollination and the mate the wood production costs of the ,membership‘ testing of clones. In spite of this important research model. These calculations found stumpage and com- effort, the number of eucalyptus clones which are pounded costs to be US$ 12 per m3 (+/- 10 %) and US$ available for mass distribution is still extremely limi- 30 per tonne (+/- 10 %), respectively. The parameters ted. Approximately 90 % of the plantations establi- used in this simulation included: shed in recent years are composed of three clones: z A growth period of four years and the harvest of 64 U6, W5 and Leizhou No 1. m3/ha of commercial wood at the end of each rota- The fact that the very dynamic eucalyptus planta- tion; tion expansion in western Guangdong is not suppor- z An average transport distance of 130 km between ted by a continuous flow of new clones selected and the plantation sites and the mill; tested for their genetic superiority and resistance to z A 6 % rate of interest for calculating the compoun- pest and diseases is a matter of concern. In other words, ded production costs; the new clonal eucalyptus plantations of western Guang- z Overhead costs of tree growers amounting to 3.5 % dong lack the minimum threshold of diversity that of their direct production/operational costs. would place the risks of pest and disease attacks at a reasonable or acceptable level. Plantation managers CONCLUSION are concerned by the recent outbreak and rapid propa- gation of a new disease - not yet clearly identified - on The Government of China is actively promoting the the clone U6 of E. urophylla. It is likely that such phe- development of a domestic wood pulp industry by nomena will become more common in the future with an expanding plantation resource made of monoclo- providing significant capital subsidies and investment nal stands, if nothing is done to guarantee a sufficient 16 The figures presented in this section are examined in grea- yearly turnover of new clones. ter detail in Cossalter 2004a and 2004b. C. Barr and C. Cossalter 280 incentives to a handful of priority projects. Most im- The wood supply strategies of both mill projects mediately, the government is supporting 13 high prio- examined in this study highlight the importance of rity pulp and paper projects – including three kraft providing secure benefits for local communities. In pulp mills – by allocating several billion dollars in dis- both cases, the pulp producers will depend heavily counted loans from state-owned banks, loan interest on collectively owned land to secure their respective subsidies from the Ministry of Finance, and an accele- plantation bases – whether these areas are leased by rated investment approval process. The government the companies or developed through outgrower sche- has also set a target to subsidize the development of mes with rural households and/or farmer coopera- up to 5.8 million ha of fast-growing pulpwood planta- tives (Cossalter 2004a). In either case, it will be impor- tions in order to provide the new mills with a sustain- tant for the companies involved and local govern- able supply of fiber. It remains unclear what portion ments to ensure that participating farmers have se- of this has been achieved thus far. cure land tenure, clear incentives for growing pulp- In this article, we have traced the wood supply wood, and fair payment for the wood they produce strategies of two of the government’s priority pulp (Lu Wenming et al. 2002). Given the large volumes of mill projects: APP’s Hainan Jinhai mill and the plan- wood that will potentially be consumed by the pulp ned Fuxing mill project. Based on existing plantation mills currently planned for South China, the develop- establishment, we anticipate that both mills are like- ment of fast-growing plantations through company- ly to face fiber shortfalls over the medium term, and community partnerships could hold considerable in APP’ s case, these shortfalls will be quite substan- promise as a strategy for raising farmers’ incomes. tial. Significant new investments in plantation deve- However, experiences from other countries suggests lopment will be needed to provide an adequate fiber that plantation outgrower schemes can also pose sig- supply at the mills’ projected capacity levels. This will nificant risks (Nawir et al. 2003; Mayer and Vermeu- need to involve not only expansion of annual planting len 2002). Further analysis will therefore be needed programs, but also measures to increase productivity to assess the strengths and weaknesses of various mo- levels and to mitigate risks at plantation sites. In par- dels for such partnerships and to evaluate the likely ticular, it will be essential to expand the genetic diver- socio-economic impacts of pulp and plantation pro- sity in the region’s plantation resource base to streng- jects on surrounding communities. then protection against pests and diseases. More generally, there is a critical need for impro- The need to raise productivity and to expand plan- ved government planning and regulation with re- tation development is particularly urgent in the case spect to large-scale kraft pulp mill projects. In particu- of the APP Hainan Jinhai mill, which began BHKP lar, it will be essential for government planning agen- production trials in November 2004. To the extent cies at the national and provincial levels to ensure that that existing plantation resources are insufficient to a fully legal and sustainable supply of wood fiber is se- meet the currently installed capacity, the mill will be cured before new pulp processing capacity is instal- forced to ship in wood from other parts of China or led (Barr 2004). This will require close coordination from external sources – which could include, for in- between the agencies responsible for industrial li- stance, forested parts of the Mekong region or Indo- censing – i. e. the National Development and Reform nesia (Barr 2004). Given APP’s experience in Indone- Commission (NDRC) and its provincial counterpart – sia – and more recently, in China’s Yunnan Province – and the State Forest Administration and provincial fo- it is conceivable that fiber shortfalls at the Hainan mill restry bureaus. Given the very large scale of modern could place new pressures on natural forests in sup- pulp mills, which now routinely have single produc- plier countries (Greenpeace 2004; Lang 2002; Barr tion lines of 700,000 tonnes or more, there is also a 2001). need for pulp producers to develop accountable plans Estimates of the delivered wood costs for the APP for meeting sustainability targets on key social and en- Hainan Jinhai mill and the proposed Fuxing mill sug- vironmental issues (Spek 2004). Government agen- gest that the cost of wood produced by state-owned cies at the national and provincial levels should moni- forest farms will often be in the range of US$ 20-25 tor the companies’ implementation of these plans to per tonne. By contrast, the cost of wood grown on ensure that key targets are being met. land that has been leased by the companies or on col- Finally, there is a need for stronger financial due lective land managed through outgrower schemes diligence practices, particularly on the part of China’s will often range between US$ 30 and US$ 40 per ton- state banks, to assess both the economic risks and the ne, depending in part on the distance the wood needs social-environmental impacts of pulp capacity expan- to be transported. These costs are significantly hig- sion projects (Spek 2004). Given the large amounts of her than the delivered wood costs reported by pro- capital required, kraft pulp mills are generally associa- ducers in Indonesia and in Brasil. This, in turn, raises ted with high levels of moral hazard, as APP’s financial fundamental questions about the competitiveness of troubles in recent years have demonstrated. In particu- wood-based pulp production in China, particularly lar, there is a need for investment institutions to in- when substantially cheaper pulp is readily available volve forestry experts in evaluating pulp producers’ on the global market. fiber supply strategies before new processing capaci- 281 China’s development of plantation-based wood pulp industry ty is financed (Barr 2004). China’s state banks would KUUSISTO, I. 2004. Trends and developments in the likely benefit from participating in the Equator Prin- Chinese pulp and paper industry. Presentation pre- ciples initiative, sponsored by the World Bank Group’s pared for the International forum on investment International Finance Corporation (IFC), and other and finance in China’s forestry sector, , Sep- international efforts to raise investment standards for tember 22-23. [http://www.forest-trends-ftp.org/ socially and environmentally sensitive projects (Spek resources/meetings.htm#Beijing_2004]. 2004). LANG, C. 2002. 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